In recent years, average wages in the U.S. have stagnated. This means that wages for some workers have declined while wages for others have risen. Understanding why this has happened is important for any policy discussion.
In economic theory, wages are largely determined by the productivity of workers. As worker productivity rises, so too will wages. However, productivity in this context is how much benefit the workers themselves add to overall production, not just the total value of goods produced by each worker. Let me offer an example.
Imagine a highly skilled worker, such as a cabinetmaker, computer programmer or surgeon. Each will have perhaps many tens of thousands of dollars’ worth of tools, and each will produce goods or services worth from several hundred to several thousand dollars per day. People in these occupations spend years in education and training, and the equipment they use is impractical in the hands of an unskilled worker. So, each of these folks receive earnings that are principally determined by the individual value each brings to their job.
In contrast, imagine a worker in a highly robotic assembly plant, surrounded by tens of millions of dollars of machinery. This worker might also be skilled, but in this case most of the value of the goods produced comes from the contribution of the machines, not the worker.
In both examples workers might be highly skilled and well paid, but there the difference ends. The highest share of income goes to the worker whose skills matter most to the production process. But this is only part of the story.
In the first example, there’s very little that can be done to make the machines matter more than the worker. If we want more cabinets, computer programs and medical care, we’ll need more of these skilled folks. In the second example, there’s little incentive to replace the workers because they represent such a small share of the cost of production. In each of these cases, workers will be in demand and the economy can grow continuously as long as they are available. But what happens to unskilled workers?
Unless they are training for a new position, workers with poor skills won’t be in demand in either setting. Even in these cases, workers without the prospects of acquiring these skills and the dependable work habits that these jobs require just aren’t needed.
The result is that the American labor force is slowly becoming polarized. At one end are highly skilled, dependable, well compensated workers. At the other end is workers who are either not highly skilled or not dependable, so will have lower wages.
Alas, there’s not much more to the story. It isn’t the decline of unions or the rise of Wall Street fat cats that have caused this. It is the inevitable decline in demand for low-skilled workers at a time when we are supplied with an abundance of them. Until that changes, expect more of the same.
About the Author
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